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MARCH 2009
MEMBER BRIEFING
LIFE SCIENCES PRACTICE GROUP
Understanding Life Science Partnership Structures
Krist Werling, Esquire
Bart Walker, Esquire
Jessica Smith, Esquire
McGuireWoods LLP
Chicago, IL, and Charlotte, NC
Companies in every industry that have attempted to raise capital and make
research and development (R&D) investments over the past twelve months have
faced significant challenges. The pharmaceutical and biotechnology sectors are
no exception. The Dow Jones U.S. Biotechnology Index was down 18% during
2008, the pharmaceutical index DRG.X lost 19% of its market value. The entire
healthcare industry has been battered during this downturn; the medical supply
index DJUSAM was down 35% in 2008; managed care companies are down
nearly 60%.1 While a significant wave of consolidation is coming (as evidenced
by Pfizer’s announced acquisition of Wyeth), the partnership options described in
this article offer options for pharmaceutical and device companies in these
challenging economic times.
Dramatic declines in the capital markets have been in part caused by, and
accompanied by the credit crunch. This restriction in available capital has
brought significant challenges to transactions in all industries, including
healthcare and biotechnology. The Biotechnology Industry Organization, a
prominent trade group, recently stated that 180 publicly traded biotech
companies have less than one year of cash on hand.2 Both venture capital firms
and private equity funds have been unable to structure leveraged buyouts and
1
2
Lawrence C. Strauss, Health-Care Stocks for an Ailing Economy, BARRON’S, Nov. 24, 2008.
Ron Winslow, Investor Prospects Look Grim, WALL ST. J., Jan. 11, 2009.
1
combination transactions requiring significant amounts of debt. As a result, a
slowdown has occurred in the execution of both large- and middle-market-sized
transactions. The lack of capital also has impacted the day-to-day operations for
many life sciences firms, particularly those relying on capital from outside
investors to advance R&D and bring new products to market.
Device and pharmaceutical companies also are facing non-economy-related
pressures. Large, fully integrated pharmaceutical manufacturers are undergoing
tremendous restructuring and cost-cutting efforts driven primarily by upcoming
patent expirations and a lack of strong products in development pipelines. For
example, in 2012 the following major drugs are scheduled to go off patent: Astra
Zeneca’s cholesterol drug Crestor; Forest Laboratories’ antidepressant Lexapro;
GlaxoSmithKline’s diabetes drug Avandia; and Merck’s asthma drug Singulair.
Device and pharmaceutical companies also are confronted with a more
conservative Food and Drug Administration (FDA) that is taking longer to
approve new products and taking a more conservative approach to effectiveness
review.3 FDA continues to be scrutinized on its approval processes for medical
devices, and approvals are expected to take longer because more clinical data is
required.4 Figure one shows the dramatic decline in the number of new drug and
biologic approvals from 1996-2007. Throughout the industry, companies are
looking for new ways to “extend the runway,” as they race to bring new products
to market before their cash reserves are depleted.
3
Matthew Perrone, FDA Approves More Drugs, Still Misses Deadlines, WASH. POST, Dec. 19,
2008.
4
See, e.g., GOVERNMENT ACCOUNTABILITY OFFICE REPORT TO CONGRESSIONAL ATTENDEES,
Medical Devices – FDA Should Take Steps to Ensure That High-Risk Device Types Are
Approved through the Most Stringent Premarket Review Process, Jan. 2009 (“We are
recommending that FDA expeditiously take steps to issue regulations for each class III device
type currently allowed to enter the market through the 510(k) process, including (1) reclassifying
each device type into a lower class or requiring it to remain in class III and (2) for those device
types remaining in class III, requiring approval for marketing through the PMA process.”).
2
Figure 1
The result of these challenges has been a renewed focus in partnering efforts.
For example, in 2008 63% of the year’s top forty biotechnology transactions
involved licensing or other types of partnering arrangements, rather than an
outright acquisition of a target company.5 Partnering can help life science firms
deal with these twin challenges of a bear market and an increasingly
conservative FDA. “Partnering efforts” is a general term used to describe the
broad range of collaborations between life science companies. These strategies
can provide needed capital or access to the skills necessary to bring products to
market or keep research programs viable when outside capital is otherwise
unavailable. Such efforts can include licensing arrangements, co-development,
co-marketing, joint ventures, and a variety of other structures. The level of
integration required to implement each varies from low to high, as does the
technology development stage at which a given strategy is best implemented.
This article describes a variety of traditional life science partnering strategies, the
unique advantages and disadvantages of each, and recent changes in partnering
driven by the current economic environment.
5
Biotech Dominates 2008 Dealmaking – 150 Deals Announced Worth $93.7 Billion, The
Dealmakers Forum, Levin and Associates, Jan. 28, 2009.
3
Strategic Investment
A strategic investment involves one company making an equity investment or
preferred debt investment in another company. This equity or debt infusion
enables the recipient to fund future R & D efforts. This partnering strategy
typically includes additional rights for the investor in either a specific product or
category of products being developed by the recipient company. This may
include, for example, preferential treatment in future investment rounds or a right
of first refusal to acquire or license technology.
This partnering strategy has several advantages. It is a hands-off transaction that
is simple to document and can be accomplished relatively quickly. Strategic
investments typically involve very low integration between the investor and
recipient. This effort may involve appointment by the investor company of one or
more members to the recipient company’s board of directors, but there is rarely a
joint project team or other day-to-day input on the development of the recipient
company’s new products. The lack of integration and control also is the most
significant disadvantage for the investing company—the investor has little real
control over the direction of the R&D or the company itself.
Many large pharmaceutical companies and device manufacturers have their own
venture capital arms to facilitate strategic investments. For example, Astellas
Venture Management LLC (the corporate venture capital arm of Astellas Pharma
Inc.) is dedicated solely to identifying biotechnology start-up companies with
promising early-stage products. Astellas Venture Management’s investment
portfolio includes over twenty early-stage companies, including AkaRx Inc.,
CoMentis Inc., and Renovar Incorporated. Amgen, Eli Lilly, Johnson and
Johnson, Pfizer, and Takeda have similar venture capital arms.6
Co-Development
A second type of partnership effort can be characterized as a co-development
relationship. A co-development relationship typically involves the joint
6
George S. Mack, Big Pharma Wants You, BIOENTREPRENEUR, Sept. 22, 2006.
4
contribution of labor, intellectual property, capital, and other assets. Many large,
fully-integrated pharmaceutical manufacturers and large device manufacturers
have established teams that specifically identify and nurture co-development
relationships. A co-development relationship is formalized when the parties enter
into a Co-Development Agreement. The Co-Development Agreement typically
establishes a joint project team that includes personnel from both companies
who will oversee and contribute to the development of a product or category of
products. A key component of the relationship is the provision of additional
capital in the form of an up-front payment, with a number of subsequent
milestone payments to move the project forward and toward product approval.
Co-development agreements also may involve equity investment or preferred
debt placement made concurrent with execution of the co-development
agreement. Companies with later-stage technology to contribute typically have
the most to gain from co-development relationships.
Co-development relationships are advantageous for the more-established party
because they allow phased contributions and access to new technologies to add
to existing product lines or bolster pipelines. Further, their collaborative teamoriented nature can create synergies and efficiencies for companies that have
existing expertise in a therapeutic area. For companies possessing a technology
that needs additional resources to bring to market, co-development relationships
can offer access to capital and expertise to complete late-stage clinical trials or
other late-stage hurdles.
There are two primary downsides to entering this type of relationship. A CoDevelopment Agreement does not result in the creation of a separate legal entity;
therefore, both companies may bear liability resulting from the relationship.
Consequently, insurance indemnification and other risk-allocation obligations
should be structured carefully. Second, if the pairing does result in a successful
product, profit and intellectual property may be co-mingled between the codevelopers. This can result in difficulty when untangling the various assets,
including intellectual property. Another key challenge is confidentiality and
proprietary information. Entering into such a relationship may make secrets
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harder to guard, and can give away certain valuable process information and
trade secrets to competitors. In this regard, co-development relationships hedge
risk, but also hedge reward.
GlaxoSmithKline (GSK) and OncoMed Pharmaceuticals entered in a codevelopment relationship in late 2007. The goal of this alliance was to discover,
develop, and market new therapies that target cancer stem cells. Structurally, the
alliance is being run through GSK’s Center of Excellence for External Drug
Discovery (CEEDD). One of GSK’s goals for CEEDD is for it to help feed the
GSK drug pipeline. OncoMed received an initial payment, the possibility of
milestone payments, and future royalties. The agreement provides GSK with the
option to license four of OncoMed’s products. A key advantage for OncoMed
here was the ability to leverage GSK’s clinical development and
commercialization capabilities.
Another recent example of co-development is the agreement Wyeth
Pharmaceuticals and Santaris Pharma entered into in January 2009. Wyeth will
give Santaris a $7 million payment and invest $10 million into the company.7 The
companies will use Santaris’ locked nucleic acid drug platform to develop drugs
with improved tissue uptake and half-life, and a higher resistance to metabolism.
Santaris will be eligible to receive milestone payments for each of ten potential
targets with the potential to total $83 million dollars.
Joint Venture
A third general category of partnering effort is the joint venture. A joint venture
can involve any number of parties but in this arena most commonly involves
either: (i) a larger pharmaceutical or device player and a start-up or (ii) similarly
sized companies that have complementary technologies. The parties form a new
entity—typically a limited liability company—to which each party will contribute
some combination of assets, intellectual property, and personnel. The joint
venture then takes responsibility for ownership and development of a product or
category of products using the assets that have been contributed by both parties.
7
Wyeth, Santaris Reach Drug Development Agreement, THE ASSOCIATED PRESS, Jan. 12, 2009.
6
Joint ventures require high integration, but the structure of the joint venture entity
itself can be flexible and can be designed to meet the goals mutually agreed
upon by the parties. Perhaps the largest benefit of a joint venture as compared
with other bio-partnering arrangements is that the separate entity structure
generally limits the liability of each individual party to its contribution to the joint
venture entity. This separate entity structure of a joint venture affiliation does
bring some challenges, however. A joint venture can be difficult to unwind.
Further, governance issues may arise: there are only two ways to structure
voting rights in a two-party joint venture: voting is either split evenly between the
parties—which can lead to deadlock—or one party holds a majority of the
votes—which can leave the minority party with less control over the venture.
Finally, joint venture collaborations between certain parties may raise antitrust
concerns. The Federal Trade Commission (FTC) has released “Collaboration
Guidelines” to assist parties in structuring compliant joint ventures.
Medtronic Inc. and Genzyme formed a new joint venture entity in 2004 called MG
Biotherapeutics LLC. MG Biotherapeutics will use cell-therapy research
contributed by Genzyme and delivery system technology developed by Medtronic
to develop novel treatments for advance cardiovascular disease. The venture
started with fifty employees in three locations.8 The board is currently composed
of Medtronic and Genzyme executives.
A more recent example of joint venture partnering is the biosimilar generics joint
venture entered into by Teva Pharmaceutical Industries and Lonza Group in
January 2009. Teva and Lonza formed the joint venture to develop generic offpatent biological drugs. Teva’s primary contribution will be its low-cost
manufacturing expertise. Lonza will contribute its ability to successfully build
complex biotech drug manufacturing plants and subsequently produce such
drugs under contract. Teva and Lonza plan to split costs and revenues evenly.9
8
Medtronic and Genzyme Form Joint Venture, N.Y. TIMES, June 2, 2004.
Andrew Kacj and Haig Simonian, Teva and Lonza Form Generics Joint Venture, FINANCIAL
TIMES, Jan. 20, 2009.
9
7
The joint venture’s plan is to produce most of the top ten biological drugs coming
off patent over the next decade.
License Agreement
A traditional license agreement is the fourth type of partnering effort that device
and pharmaceutical companies may consider. Licensing can occur at nearly any
stage of product development and typically involves up-front payments to a
product developer by an entity who will receive the exclusive right to use or
market the technology. Up-front payments also are found in the co-development
partnering strategy discussed earlier. Licensing differs from co-development in
that licensing generally involves less integration and collaboration between the
partnering entities.
Entering into a licensing agreement is advantageous for the licensee because
fees can be structured to fluctuate with sales success. Further, licensing a
product typically costs the licensee less than developing a technology or buying it
outright. The licensor benefits from such an arrangement when the licensor lacks
resources such as capital or manpower to bring a product to market.
A few drawbacks to licensing exist. From a licensor’s perspective, licensing a
product diminishes profit potential. The licensor also loses total control of the
product’s form in the marketplace. Similarly, the licensing agreement may
prohibit the licensee from altering the technology significantly to fit their needs or
may prohibit uses in certain therapeutic areas. Licensing can also—similar to
joint ventures—bring up unique antitrust concerns. The FTC may view an
exclusive license as an acquisition of intellectual property, which would make the
transaction reportable under the Hart Scott Rodino Act.10 The FTC has released
a guidance covering intellectual property licensing that can assist entities in
structuring a compliant licensing agreement.11
10
15 U.S.C. §18a.
Antitrust Guidelines for the Licensing of Intellectual Property, U.S. DEP’T OF JUSTICE and the
FED. TRADE COMM’N, Apr. 6, 1995.
11
8
Pfizer Inc. obtained an exclusive license for Avant Immunotherapeutics’ Phase 2
therapeutic cancer vaccine candidate CDX-110 on April 16, 2008. Pfizer made
an initial payment of $40 million to Avant and a $10 million equity investment in
the company. Under the agreement, Avant also will be eligible to receive
milestone payments if Pfizer is able to successfully develop and commercialize
CDX-110. The agreement was subject to FTC approval under the Hart Scott
Rodino Act, and the parties obtained clearance less than one month after public
announcement of the agreement.
Co-Marketing Arrangement
Co-marketing a product is the final basic type of partnering effort. A co-marketing
arrangement typically is entered into with a later-stage product. Royalty
payments are exchanged for the right to produce and/or sell a product. This type
of arrangement most commonly permits both parties to sell a product, sometimes
in distinct market segments. Entering into a co-marketing arrangement is an
effective method of increasing market penetration when financing for marketing
efforts is limited.
The major drawback of this type of arrangement is that co-marketing can be
viewed as anti-competitive behavior, particularly when parties share pricing and
marketing information. However, the Department of Justice (DOJ) has approved
a variety of co-marketing arrangements so it is possible to structure a comarketing arrangement without engaging in prohibited anti-competitive behavior.
Olympus America Inc. and C.R. Bard Inc. entered into a co-marketing
arrangement in 2001 to market and sell endoscopy products such as forceps.
The arrangement designated Bard as the exclusive dealer for Olympus
endoscopy accessory products. Olympus became a non-exclusive sales agent
for Bard’s products. This arrangement was submitted to and approved by DOJ.
The two primary factors in the approval decision were that Olympus’ products
were reusable and Bard’s were disposable, and that combined Bard and
Olympus’ share of these types of products did not significantly exceed the 20%
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market share threshold that is commonly used in these types of analysis.12 Key
factors that go into an antitrust analysis of this type include market share under
the arrangement, control of the collaboration’s competitively significant decisionmaking, the likelihood that anti-competitive information will be shared between
the parties, and any pro-competitive benefits that will result from the
collaboration.13
Recent Changes in Partnership Strategies
The current economic climate has left some potential partners with limited cash
available to fund outside activities. For example, anticipating upcoming patent
cliffs, many large, fully-integrated pharmaceutical manufacturers have adopted
strategies intended to conserve cash. As a result, partnering efforts are evolving
in the current economic environment.
Companies that have fared well during the downturn are seeking bargain-priced
acquisition targets because of depressed values. For example, Abbott
Laboratories, whose fourth quarter 2008 profit increased 28% largely due to its
dual successes with Humira and the Xience heart stent, is “browsing small and
medium-sized companies that make medical–technology products” because
Abbott has $3.77 billion cash-on-hand and “it’s a good time to be a buyer.”14
Medtronic is another company that has fared relatively well in the downturn and
is open to making small acquisitions “if the price was right.”15
One recent exception to this is Pfizer’s $68 billion acquisition of Wyeth,
announced in January 2009. This acquisition was driven primarily by Pfizer’s
upcoming patient expirations and its desire to diversity its healthcare portfolio.
The acquisition price was necessarily a bargain, but Wyeth was uniquely
positioned to help Pfizer diversify and fix its patent-expiration problem because of
Wyeth’s strength in targeting unmet biotechnology needs.
12
Letter from Charles A. James to Philip S. Van Der Weele, DEP’T OF JUSTICE ANTITRUST DIV.,
Aug. 29, 2001.
13
Antitrust Guidelines for Collaborations Among Competitors, FED. TRADE COMM’N and U.S. DEP’T
OF JUSTICE, Apr. 2000.
14
Tom Randall, Abbott Chief Sees ‘Good Time’ to Shop for Deals, Bloomberg.com, Jan. 21, 2009.
15
Ben Hirschler, Medtronic Sees ‘Tuck-In’ Buys, No Big Deals, Reuters.com, Jan. 28, 2009.
10
For companies that have not fared as well, partnership efforts that require lower
integration or less up-front cash commitment have become increasingly popular.
Following are three key trends in partnership strategies:
Technology Licensing to Raise Cash
Technology licensing has increased in various niche areas. This is a result of
development firms seeking to monetize assets through licensing technologies
that are not central components of their research. Licensing these non-core
assets can provide a necessary cash infusion to the developing company. For
the licensee, a technology license offers access to a new technology without an
otherwise-significant commitment.
Technology Asset Sales
Technology asset sales also are becoming more prevalent. Asset sales do not
involve significant partnering, but are appealing for companies that are
desperately low on cash. The lack of available bank financing also has resulted
in increased use of seller notes and earn-outs. When seller notes or earn-outs
are used, a seller in an asset sale retains some stake in the outcome of the
development program after the cash-generating activity has occurred.
Inflazyme Pharmaceuticals Ltd. and Biolipox AB entered into an asset sale in late
September 2007. Biolipox acquired the majority of Inflazyme’s assets, including
its research and development programs on PDE inhibitors and protein
therapeutics.16 In exchange, Inflazyme received an up-front cash payment and
the possibility of future lump sum payments based on clinical milestones.
Inflazyme also retained the possibility for royalty payments based on key
technologies.
Extended Milestones
Finally, most partnership activities where cash is provided to one of the partners
are being provided on a milestone-based structure. Even deals involving firms
16
Inflazyme Pharmaceuticals, Ltd. Signs Asset Sale Agreement with Biolipox AB for a Potential
Value of up to $11 Million, Plus a Royalty Payment, BIOSPACE, Sept. 24, 2007.
11
with highly marketable technology are being faced with milestone structures
instead of lump-sum strategic investments or co-development arrangements.
Growth companies evaluating these possible arrangements should carefully plan
achievable milestones that will coincide with capital needs. This will enable R&D
efforts to survive through an unknown length of time during which the credit
crunch will continue to make cash hard to come by.
Conclusion
Pharmaceutical, biotechnology, and medical device companies currently face
significant economic and non-economic challenges. Tumult in the capital markets
and the resulting credit crunch have significantly restricted the amount of
available capital. Approaching patent expiration deadlines also will impact device
and pharmaceutical companies’ bottom line. Further, the FDA has recently taken
a more conservative approach to effectiveness review, and new drug and device
approval times are increasing.
Partnering efforts are one viable strategy a pharmaceutical, medical device, or
biotechnology company should evaluate during these challenging times. Entering
into a licensing arrangement, co-development or co-marketing effort, or a joint
venture can provide a company with needed capital and access to the skills
necessary to bring products to market or keep research programs viable. Further,
partnering can be an effective alternative to an IPO or selling an entity to a fully
integrated pharmaceutical company or device manufacturer. The partnering
strategies presented in this article are the most basic options in their fundamental
forms. Various hybrids of each are possible and can be individually tailored to
meet unique objectives.
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Understanding Life Science Partnership Structures © 2009 is published by the American
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